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Illegal Accounting practices of Enron

Illegal  Accounting Practices of Enron

                Many
different types of illegal accounting practices have been made in the previous
decades. None as famous and as cited as Enron. They used their loopholes and
manipulation to defraud the system. Enron will be our example as we learn from
their mistakes and learn to make  better
accounting decisions.  We will learn:

·        
The Importance of Sarbanes-Oxley Act

·        
What are Special Purpose Entities

·        
What is Insider Trading

·        
What are Mark to Market accounting

·        
What are Sham Swaps

·        
What are Prudency Accounts

Background Behind the Giant

                Enron
was a powerful company that was broadening their empire with many different
types of services and products, ranging from Wood products to broadband
internet. The company was very successful in their ventures until they reach a
problem. They had previously been using a light asset strategy(Using
contractors and outside services instead of buying these assets to use them
yourself) and were in 10 billion in debt because of it. With an enormous amount
of debt how would they received loans for their growing ventures? (Lawrence, Weber, and Post, 2005)

The Scam

                They
made Special Purpose Entities (a legal entity designed to accomplish a specific
and sometimes temporary goal) and moved their debt to these companies to make
it  look like they were financially
sound. Although these SPCs never did anything. With their debt greatly reduce
they began to work on their assets now that their liabilities were gone. (Lawrence, Weber, and Post, 2005)

                They
used a three major accounting manipulations to make their revenue seem higher
or just higher temporarily.  Mark to Market
is an accounting process use to make revenues higher that they really are by
using projected numbers instead of actual numbers in their current revenue. An
example of Mark to Market accounting is when Enron started a partnership with
block buster to deliver movies to viewers 
homes using Enron's Broadband network. Although the venture never came
through Enron still used the projected revenue in their current earnings. This practice
was grossly manipulated to serve Enron's needs as opposed to be a useful accounting
process. Another tool in their arsenal was Sham swaps. This is when a company
trades assets before the quarters ends to make their assets seem higher. Both
companies exchange money and both companies look better. Last of the major
tools they used were the Prudency accounts. Traders would often spilt profits
into categories, one that went into a reserve fund that would make the books
seem less risky and the other into the financial statement. The executives also
sold their shares when they knew the end was close. This is inside trading
because they stole from the public using inside knowledge. (Lawrence, Weber, and Post, 2005)

Regulations Put In Place

                You may
be thinking how did they get away with all these deceptive practices? This is
where the main point comes into play. Sarbanes-Oxley Act came to be due to the
increasing fraud from these major corporation which all started with Enron. The
reason that the accounting audits never reported these finds what because of
they were internal and offered consulting services which created forms of
bribery and in a way black mail. Here are some of the major points:

·        
The at makes all accounting audits external and
with no services like consulting from the same firm.

·        
The act also states that the executives take
into account own responsibility for their actions and has increased to
penalties for these acts of fraud.

 

·        
Also makes the company show more of their books
like balance sheets, pro-forma figures and stock transactions.

·        
It outlines fraud better and allows the
protection for whistle blowers. (Unknown,
2010)

               

Conclusion

                Accounting
is a process which ensures order and accuracy, but what can happen when people
manipulate the system to their own ends? Enron a massive  corporate giant once stood for America's
business prowess and power. Now stands as a reminder what can happen with just
a few ill-placed numbers.

Bibliography

Lawrence, A. , Weber,
J. , & Post, J. (2005).Collapse enron. (11th ed., pp. 408-420). New
York, NY: McGraw-Hill.

Unknown, . (2010, June
21).
 Sarbanes-oxley act. Retrieved from
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act

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